Stock Review: BHEL

Making its headway towards indigenous technologies and localisation of material costs, engineering major Bharat Heavy Electricals (Bhel) has reported strong financial performance for the year ended March 2011, with a consolidated topline growth of more than 26%. The company's operating margins have improved by more than 250 basis points for the year.

The growth, however, includes accounting adjustments to the tune of about . 2,773 crore in net sales and about . 983 crore in the profit before tax in an attempt to align the company's accounting practices with those of IFRS. These adjustments, however, have no significant impact on operating margins.

The company's long-term arrangements with key material suppliers and its attempt to secure material from cheaper resources, including China, have paid well in terms of curbing the impact of rising material costs. This has helped Bhel boost its margins, despite pricing pressures in a competitive environment.

Moreover, given its order backlog of over . 1.64 lakh crore, which translates to over four times its consolidated revenue for the year (before accounting adjustment), Bhel is comfortably placed to meet its guidance of 20% revenue growth to . 50,000 crore in FY12.

However, with 80% of this backlog attributable to its major business segment — power — issues like coal linkages, environmental clearance, land acquisitions, etc, can lead to execution delays in the near term.

Notwithstanding these shortterm hiccups, which are an inherent dilemma for the long-gestation projects, Bhel appears well poised for growth in the near term. A proposal to launch an NBFC to meet the growing threat of easier Chinese financing is also under consideration. The NBFC will also optimise returns on idle cash of over . 9,700 crore with the company.

With the proposal to split the company's shares in 1:5 ratio, the company probably intends to increase retail participation in trading of its shares, thereby improving its volumes. The government has also proposed divestment of 5% in Bhel, which — at the current market price of . 1,935 per share — is likely to add more than . 4,700 crore to the exchequer's treasury. The divestment will only bring down the sovereign holding in the company to 62.7%, with no major impact on the company's future outlook.